Essent Group Ltd. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Essent provides private mortgage insurance and reinsurance, and since July 2023 also title insurance and settlement services. Comparative figures are for Q1 2023 unless otherwise noted. Financial statements are unaudited.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $298.4 million | $256.2 million |
| Net premiums earned | $245.6 million | $211.3 million |
| Net investment income | $52.1 million | $43.2 million |
| Income before taxes | $213.7 million | $201.3 million |
| Net income | $181.7 million | $170.8 million |
| Diluted EPS | $1.70 | $1.59 |
| Operating cash flow | $216.9 million | $184.8 million |
- Revenue increased about 16% and net income about 6%. Management attributed stronger results mainly to higher earned premiums and investment income, partly offset by higher expenses and loss provision.
- Net premiums written were $238.5 million. Mortgage insurance new insurance written (NIW) fell to $8.3 billion from $12.9 billion, while average insurance in force rose to $238.6 billion from $228.9 billion. The net average premium rate increased to 0.36% from 0.34%.
- Investment income benefited from a larger average portfolio ($5.8 billion versus $5.3 billion) and a higher pretax yield (3.7% versus 3.4%). Net loss from other invested assets was $1.9 million; realized investment losses were $1.1 million.
- Loss and loss-adjustment expense provision was $9.9 million, compared with a $0.2 million benefit. Current-year losses of $39.4 million were partly offset by $29.5 million of favorable prior-year development. Ending default inventory was 13,992, versus 12,773 a year earlier; the reported default rate was 1.72%, versus 1.57%.
- Other underwriting and operating expenses rose to $57.3 million from $48.2 million, reflecting higher compensation, title-business costs and other expenses. Title operations contributed $17.9 million of revenue and a $4.0 million pretax loss in Q1 2024; figures include the acquired businesses.
- Cash and investments totaled approximately $5.8 billion at March 31, including $164.3 million cash, $1.2 billion short-term investments and $4.2 billion fixed maturities. Operating cash flow was $216.9 million; investing and financing activities used $151.3 million and $43.2 million, respectively.
- Credit facility borrowings were $425 million principal ($422.2 million carrying value), at a 7.06% weighted-average rate at quarter-end, with maturity in December 2026. The $825 million facility had $400 million available revolving capacity. The company reported covenant compliance.
- Total assets were $6.56 billion, total liabilities $1.34 billion and stockholders’ equity $5.23 billion. The company reported a $302.3 million accumulated other comprehensive loss, primarily reflecting unrealized investment losses.
Changes, outlook, risks and unusual items
- Mortgage insurance NIW declined year over year amid higher mortgage rates and reduced mortgage origination activity. Management noted that higher rates also supported investment income and policy persistency; persistency was 86.9% at quarter-end.
- Management expects claims and loss provision to rise as the comparatively recent book seasons: 46% of insurance in force relates to business written since January 2022 and was less than three years old at quarter-end. Actual losses remain sensitive to economic conditions, home prices, interest rates, employment and borrower performance. No numerical earnings guidance was provided.
- Management said it had sufficient liquidity to meet operating needs and obligations for the next 12 months. Essent Guaranty reported $3.5 billion of PMIERs available assets, or 173% of its $2.0 billion minimum required assets; its combined U.S. mortgage insurance risk-to-capital ratio was 10.0:1. The filing reports compliance with PMIERs and applicable insurance requirements.
- Investment fair value was below amortized cost, with $354.5 million of gross unrealized losses at March 31. Management attributed these primarily to interest-rate changes, noted that approximately 98% of securities were investment grade, and recorded no impairment for the quarter. A 100-basis-point parallel yield-curve shift would change available-for-sale investment fair value by approximately 3.3% at the disclosed effective duration.
- Bermuda’s new 15% corporate income tax is scheduled to begin in 2025. Essent expects its Bermuda entities to qualify for a five-year limited-international-presence exemption and does not expect a material effective-tax-rate impact before the exemption ends, but eligibility depends on interpretation and continued satisfaction of criteria.
- Other items: Q1 comprehensive income was $160.0 million, below net income because of a $21.8 million after-tax investment-related OCI loss. The title acquisition’s purchase-price allocation remained subject to adjustment through July 1, 2024. The board declared a $0.28-per-share dividend in April. The company repurchased 97,111 shares for $5.1 million under its repurchase authorization through March 31.
- Key risks include changes in GSE requirements or practices, competition and mortgage-insurance demand, uncertain loss reserves, economic and housing-market deterioration, interest-rate and investment risks, reinsurance availability and performance, and regulatory or tax changes. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether lower NIW and mortgage-origination volumes persist, and how they affect insurance in force, premium rates and earnings.
- Whether defaults, claim severity and reserves rise as newer insurance vintages season; assess the significance and sustainability of favorable prior-year reserve development.
- How title operations perform after acquisition, including whether the reported quarterly pretax loss narrows and purchase-accounting adjustments are finalized.
- Investment portfolio exposure to interest rates, unrealized losses and liquidity needs, as well as the impact of floating-rate debt costs.
- Essent’s continued PMIERs and statutory-capital compliance, dividend capacity at insurance subsidiaries, and eligibility for the anticipated Bermuda tax exemption.